Institutional Quality and Environmental Degradation Nexus: Asymmetric Analysis for Pakistan

Abstract

Purpose: This study explores the dynamics of environmental degradation in the context of Pakistan. The primary objective is to empirically investigate the asymmetric nexus of institutional quality, financial development, and carbon emissions in the short and long run for Pakistan’s economy.

Research Gap: The exploration of an asymmetric analysis regarding the nexus among the institutional quality, financial development, and environment in Pakistan remains a significant gap in the existing literature. The available literature ignores the potential asymmetry in the relationship between these variables, the present study fills this gap by analyzing the asymmetrical relationship among institutional quality, financial development, and carbon emissions along with other macroeconomic variables. i

Design/Methodology/Approach: To estimate the model, a non-linear ARDL estimation technique is employed using the data from 1984 to 2020 which allows for the exploration of nonlinearity in these relationships, offering a more accurate representation of the dynamic nature of the environmental degradation process.

The Main Findings: The findings of the study support the existence of the asymmetrical relation between institutional quality, financial development, and environmental degradation in the case of Pakistan. Results reveal a negative relationship between forest area, financial development, and institutional quality; when these factors improve, CO2 emissions decrease, hence improving environmental quality. While, economic expansion, urbanization, and energy use, has also a significant positive effect on the environment.

Theoretical/Practical Implications of the Findings: The findings suggest that a better institutional framework along with ensuring better governance, law and order, and political stability also helps to combat corruption which holds the potential to reduce carbon emissions. Additionally, policies should be made regarding regulations of financial developments and more loan facilities should be provided for projects that mainly focus on clean and carbon-free projects.